The Shanghai Futures Exchange (SHFE) launched the mock trading of copper-future option and gold-future option on November 19. On the first trading day, the trading went steadily and sound, and the technical system ran in good order.

The SHFE launched the mock trading of two products, the copper-future option and the gold-future option. It launched mock trading contracts of 5 months for CU1401-CU1405 copper futures contracts and launched mock trading contracts of 6 months for AU1401, AU1402, AU1404, AU1406, AU1408, and AU1410 gold futures contracts. During the mock trading, the copper and gold options of the SHFE adopted European style option. The time for the mock trading is from 9:00 to 11:30 in the morning and from 13:30 to 15:00 in the afternoon, and for now, the continuous trading will not be opened for the mock trading.

It is learnt that altogether 1,410 corporate and natural person accounts have participated in the mock trading, the turnover of the gold option on the first day of the mock trading is 35,848 contracts, and that of the copper option is 30,750 contracts.

Mock trading of options is a necessary part for listing of options and the SHFE will, under the arrangement of the China Securities Regulatory Commission (CSRC), promote relevant preparatory work of options.

Market participants actively responded to the SHFE’s option test. Jing Chuan, Vice General Manager of CITIC Securities Futures, said that the Shanghai style option, having combined the advantages of the American style option and the European style option, is flexible and risk-controllable. Such rules as reasonably setting the step size and the minimum fluctuation price have effectively covered the daily market risks and even those in extreme conditions. And choosing of contracts in active months as the targets will fully bring off the price-discovery function of futures and enrich the hedging and investing methods of enterprises and investors.

Market participants believed that this test has its highlights. For example, the Delta-mode margin system is very innovative. Mao Shuneng, Researcher of Galaxy Futures, said that the launching of the gold option and the copper option of the SHFE has attracted wide market attention. The biggest highlight of the option scheme put forward by the SHFE is the Delta-mode margin system, which is obviously different from the previous option margin systems of several other exchanges. Compared with the traditional margin system, the Delta-mode margin system can take into account of the risk characteristics of options and at the same time ensure the efficiency of the use of capital, making it a very scientific and reasonable margin system.

Hong Zhenning, Senior Option Analyst of SWS Research Co., Ltd., pointed out that compared with the option designs released by other exchanges, the option design draft of the SHFE has some innovative ideas, such as the option structure with Chinese characteristics that falls between the American style and the European style, the creative exercising and pairing method of “Random Drawing”, and the seller’s margin calculated by the Delta risk value. The SHFE has also scientifically designed the exercising rules. For example, it will automatically exercise the option when the in-the-money option expires; the out-of-the-money and the at-the-money option will be automatically abandoned; and the out-of-the-money option is allowed to apply for exercising, which is more beneficial to the buyer of the option.

“Judging from the option trading rules released by the SHFE, we can notice many innovations that have integrated the features of the international market and the domestic market. I believe it’s a highlight of the blank options market.” said Chen Jiazhi, Structured Products and Derivatives Researcher of Jinrui Futures. He believed that the mock trading of copper-future and gold-future options is a preparation for the official listing of relevant contracts, which will help to test trading strategies, evaluate options’ prices, and establish the implied market-oriented volatility curve. As a fundamental tool for derivatives, options can satisfy China’s diversified needs for hedging in metals.